Wall Street Strategists See Stock Gains by Year-End Despite High Yields

Wall Street strategists are projecting a rise in equities by year-end, attributing the outlook to strong artificial intelligence-driven earnings and favorable historical trends associated with midterm election years. This optimism persists even as bond yields remain near 24-year highs, creating a mixed environment for investors.

Truist chief investment officer Keith Lerner described the path of least resistance into year-end as higher. He noted that Wall Street expects S&P 500 earnings to jump 30% year over year, with major banks set to begin a quarterly reporting season that could prove to be blockbuster. Lerner observed that concerns over the pace and spending of the AI trade have weighed on technology valuations, causing the Technology sector to trade at a price-to-earnings ratio of around 21, down from roughly 35 at this time last year. He argued that this reset in market valuations and sentiment suggests potential upside before the year concludes.

Historical data supports the view of a fourth-quarter rally during midterm election years. The S&P 500 has posted positive returns in this period about 84% of the time in such years, with an average gain of approximately 7%. Lerner identified 2018 as the sole outlier, noting that it coincided with Federal Reserve rate hikes and concerns about monetary policy tightening. While strategists are factoring high rates into their forecasts, Yardeni Research recently lowered its year-end S&P 500 price target to 7,900, citing rising bond yields. This revised target implies just over 1% upside from current levels.

Market sentiment has been volatile recently, with stock breadth narrowing. However, shares recovered from a drawdown on Friday following a Bloomberg report that OpenAI expects to reach or exceed $70 billion in annualized revenue by the end of the year. This news helped alleviate fears that the AI boom was losing momentum. Dan Ives, partner and senior managing director at Yorkville Ives, told Yahoo Finance that conditions are accelerating, characterizing current dips as buying opportunities rather than reasons for caution. He described the current moment as the third inning of the AI revolution.

Wall Street now expects the Federal Reserve to hold rates steady at its October meeting, following a unanimous vote for a quarter-point hike in September. UBS analysts have also highlighted growing AI demand in their recommendations, though they advise a diversified approach. Ulrike Hoffmann-Burchardi, UBS chief investment officer of the Americas, suggested investors focus on top-tier chipmakers and hardware companies benefiting from AI investment, along with large-scale platforms and defensive technology stocks.